from the getting-it-wrong dept

Amongst economists and those who draw on their thinking, the names Reinhart and Rogoff are well known for work published under the title "Growth in a Time of Debt," which sought to establish the relationship between public debt and GDP growth. The key result, that median growth rates for countries with public debt over 90% of GDP are about one percent lower than otherwise, and that the mean growth rate is much lower still, has been cited many times, and invoked frequently to justify austerity economics -- the idea being that if the public debt is not reduced, growth is likely to suffer badly.

In a new paper, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadsheet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.

They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result.

In his post, Konczal goes on to give a good explanation of just what went wrong. Correcting those three major errors produces the following result:

So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

That is, not only is there no significant difference between countries whose public debt-to-GDP ratio is over 90%, and those with much lower values, there is apparently no critical number above which growth falls catastrophically. Put another way, from the corrected research, there does not seem to be any reason why the public debt-to-GDP ratio cannot keep on rising while preserving normal levels of growth.
That clearly runs entirely contrary to the current dogma that public debt must be reduced at all costs in order to keep growth at a healthy level. As the authors of the new paper conclude (pdf):

RR's [Reinhart and Rogoff's] findings have served as an intellectual bulwark in support of austerity politics. The fact that RR's findings are wrong should therefore lead us to reassess the austerity agenda itself in both Europe and the United States.

That debate about public debt reduction and the need for austerity measures certainly won't stop just because a key justification for the approach has been found to be completely wrong. But it's worth noting that alongside the major political ramifications of this new finding, there is another, rather less contentious, conclusion to be drawn.

The three errors in the original work by Reinhart and Rogoff finally came to light when they allowed other researchers to examine their model and the data they employed in it. It then became clear that the model was flawed, and that not all the relevant data had been included in the calculation. Neither was obvious from the result alone.

This reinforces a point we have made before. Alongside the results of their work, academics also need to release the datasets and any mathematical/computational models that they have used to derive them. Without those additional resources, it is not possible for other researchers to reproduce the results, which may -- as turns out to be the case for Reinhart and Rogoff's famous paper -- contain fundamental errors that completely undermine the conclusions drawn from them.